Frances Chalmers and Darrell McLaughlin Estate v. Minister of National Revenue, [1990] 1 CTC 2488, 90 DTC 1361

Mogan, T.C.J.:— The appeals of Frances Chalmers and the Estate of Darrell McLaughlin were heard together on common evidence. The late Mr. McLaughlin who died in October 1983 was the brother-in-law of Frances Chalmers having married her sister, Carol. Prior to his death, Mr. McLaughlin and Frances Chalmers had operated a trailer park in partnership. The issue in these appeals is whether, during the taxation years 1982, 1983 and 1984, the trailer park was operated with a reasonable expectation of profit. For convenience, I shall refer to both Frances Chalmers and the late Darrell McLaughlin as the appellants.

The trailer park, known as “Battle Hill Park Campground", occupies 10 acres of land in Ontario located 8 miles east of Picton and 20 miles south of Napanee, on county road No. 8 one mile north of Highway 33. The 10-acre parcel has waterfront on a cove off Lake Ontario and is part of a 200-acre farm which has been in the family of Frances and Carol for many years. The appellants first thought of operating a trailer park in 1970 but they were not really open for business until 1976 when they installed a 40 ft. x 20 ft. in-ground swimming pool, 4 feet deep all over. They needed the pool because the cove had a clay bottom which caused the water to be muddy if there were swimmers or even a high wind.

The trailer park had 96 lots serviced with electricity and running water from a well. There was a large recreation building which contained a store, a laundromat with 2 washers and 2 dryers, 8 flush toilets and 6 showers. Outdoors, there were swings, a teeter-totter and a dumping station. The appellants were trying to develop a "resort-style" trailer park where customers would stay for several days rather than drop in overnight. The appellants promoted their trailer park in the normal manner: they distributed attractive brochures; they advertised in appropriate periodicals; they rented space at selected trade shows in Toronto like the Sportsman's Show and Camp-on- Wheels; they belonged to the Ontario Private Campground Association; and they relied on local signs and word-of-mouth references. The trailer park has been operated every year from 1971 or 1972 up to and including 1989.

The appellants attempted to operate the trailer park from May to October each year. During that period, Mrs. Carol McLaughlin would live on the site and perform most of the maintenance work like mowing the grass and cleaning the facilities. The appellant, Frances Chalmers, is a registered nurse with full-time employment in Toronto. She was responsible for the advertising and would commute to the campsite each weekend where she would help her sister with maintenance which included landscaping around the in-ground swimming pool. When Darrell McLaughlin died in October 1983, Frances Chalmers and her sister Carol attempted to hire a manager for the trailer park but it was difficult to find a responsible person who would work May to October with particular emphasis on weekend duties.

The appellants entered in evidence certain extracts from government publications which indicated (a) that tourism declined in Canada in 1982 to 1984 from the period 1980-1981; (b) that the daily temperature in the Picton area for August 1982 was 2.5 degrees Celsius below the average daily temperature for that month; and (c) that rainfall in the Picton area for July and August 1982 was approximately two centimetres higher than the average rainfall for those two months in the prior decade. This evidence was apparently introduced to prove that the poor performance of the trailer park for 1982 was caused by forces beyond the control of the appellants. There is no doubt that bad weather plus an economic recession Will adversely affect the tourist industry and reduce the number of persons wanting to use a trailer park.

The losses suffered by the trailer park in 1982-1983-1984 were, however, only a small part of a bigger picture. In the period 1971 to 1989, there was not one single holiday season (May to October) when the trailer park earned a profit. In the early years (1971-1975), there was no profit to encourage expansion. In the years 1976-1981 after the recreation building and swimming pool were completed, there was no profit. And there was still no profit in the years under appeal (1982-1984) or in the five subsequent years (1985-1989) preceding this hearing. What makes the appellants' case difficult is not simply the absence of profit but the significant loss which occurred in each year for which final information was made available in evidence. Set out at the end of these reasons is a table showing the relevant financial information for the appellants' partnership in the period 1976-1984.

Mr. Hasenclever, the accountant who prepared the financial statements for the trailer park and the income tax returns for the appellants, testified at the hearing. He stated that the trailer park was owned and operated in the period 1971-1975 by Battle Hill Park Limited, a corporation controlled by the appellants or other members of the Chalmers/McLaughlin families. When he met the appellants in 1976/1977, they asked him how they could deduct the losses incurred by the corporation from their personal income. His advice was to lease the site from the corporation and operate the trailer park as a partnership.

The rent shown in the table below was paid by the appellants’ partnership to Battle Hill Park Limited. When explaining the amount of rent and how it fluctuated, Mr. Hasenclever stated that the rent was the lesser of (i) what he thought the property was worth; and (ii) the appropriate amount for tax purposes. In his mind, the appropriate amount for tax purposes was the amount which would recover the maximum income tax refund for the appellants. In the pleadings, the respondent alleged that he assumed that the rent paid by the appellants’ partnership in the period 1976-1980 enabled the corporation to absorb its accumulated business losses for the years prior to 1976. In evidence, the appellants did not contradict this assumption and Mr. Hasen- clever’s comments stand as the only explanation for the significant reduction in rent for 1981 and 1982. Even with the reduced rent, the trailer park suffered substantial losses in the years under appeal. If the value of the trailer park would justify an arm's length rent of $30,000 per year as Mr. Hasenclever thought in 1978 and 1979, then the losses in the years under appeal would be even greater if the partnership had actually paid such arm's length rent.

I have concluded that these two appeals must be dismissed because the appellants have failed to prove that the trailer park could be operated with a reasonable expectation of profit. Indeed, they have failed to prove that it could be operated with any expectation of profit. Mr. Hasenclever stated that the key to breaking even was to have 50 per cent occupancy plus some excess occupancy from time to time. There was a guest register maintained at the trailer park for each guest, family or group who stayed overnight whether they used one of the 96 serviced lots or simply camped in the open area. The guest register was not produced in evidence; nor were there any statistics which might have proved how close the appellants came to achieving 50 per cent occupancy. Judging by the operating statements (Exhibit A-20) which are summarized in the table below, the appellants must have fallen far short of the 50 per cent occupancy level which was required just to break even.

Counsel for the appellants relied on a number of arguments including the length of time required to develop this kind of business; whether circumstances like weather and the economy which reduced revenue were predictable or within the appellants' control; and what he suggested was a trend to increased revenues. In my view, the evidence did not support these arguments. The appellant Chalmers stated that they were not really in business until 1976 when the swimming pool was installed and the recreation building completed. And yet, in the following 13 years (a more than adequate development period for any business), the trailer park never showed a profit. Although the economy may have been down and the summer may have been cool and wet in 1982, there were other years when the situation was reversed with still no profit. And finally, I did not see a trend to increased revenues. If the user fees were increased at the trailer park from 1981 to 1984, the occupancy rate was probably falling in those years and, according to the appellants' accountant, 50 per cent occupancy was the key to just breaking even! There was not enough evidence to determine trends in occupancy or real revenue based on occupancy.

In Moldowan v. The Queen, [1978] 1 S.C.R. 480; [1977] C.T.C. 310; 77 D.T.C. 5213, the Supreme Court of Canada laid down the following rule concerning reasonable expectation of profit from a business: whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all the facts. And in Coupland v. The Queen, [1988] 1 C.T.C. 414; 88 D.T.C. 6252, Reed, J. quoted from Moldowan and then stated at page 417 (D.T.C. 6254):

In my view, the Moldowan case sets out rules which are applicable in all cases, regardless of whether the business under review is farming or of some other type. Also, I do not accept that there is unfair treatment because a taxpayer must demonstrate that he is engaged in a genuine business enterprise before being allowed to deduct, for tax purposes, the expenses related thereto. This rule is designed to prevent taxpayers writing off personal expenses under the guise of business expenses. It is designed to promote equity as between taxpayers.

There is no doubt in these appeals that the appellants made a sincere attempt to operate a trailer park over a period of many years. The sincerity of their effort is of no assistance, however, if the business, on an objective basis, did not have a reasonable expectation of profit. In Mason v. M.N.R., [1984] C.T.C. 2003; 84 D.T.C. 1001, Bonner, J. stated at page 2004 (D.T.C. 1002): "Subjective optimism, no matter how sincere, does not meet the test."

Mr. Hasenclever stated that he advised the appellants to "hang on” in 1982 because farm prices had gone down an they had not been able to subdivide their land. I question whether he would ive given that advice if the appellants had not earned the outside income agains. which the trailer park losses were applied to recover income tax that otherwise wo* Id have been payable on such outside income. There is no evidence that they were advised to "hang on" because of the trailer park's reasonable expectation of profit. For the above reasons, the appeals are dismissed.

N.B. The attached table is an integral part of the reasons for judgment.

[Appendix A]

	FINANCIAL INFORMATION FOR PERIOD 1976-1984
	1976	1977	1978	1979	1980	1981	1982	1983	1984
Revenue	2,636	9,865	11,805	10,018	10,382	13,070	9,744	8,427	6,861
Expenses	6,828	12,321	18,913	13,700	18,853	17,471	23,559	15,979	20,469
Operating	4,192	2,456	7,108	3,682	8,471	4,401	13,815	7,552	13,608
Loss
Rent	24,000	28,000	30,000	30,000	29,000	15,000	8,952	10,389	—
Other Costs	—	—	—	—	4,107	23,504	29,637	4,674	15,873
Net Loss	28,192	30,456	37,108	33,682	41,578	42,905	52,404	22,615	29,481

Appeals dismissed.